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BPO faces the taxman’s axe

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CIOL Bureau
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GURGAON: Pink Elephant campaigns, attrition, telecom infrastructure, soft skills, training and development- Indian BPOs can add one more concern in their kitty–the Indian taxman. Post the Indian Prime Minister fighting out the backlash issue, the home ground might have something inclement in store for this sunshine industry, which is entitled to tax holidays under section 10A and 10B of the Income Tax Act.







First, Central Board of Direct Taxes (CBDT) might like to impose a tax on the royalty from imported software as withholding tax in the coming budget. The second concern is about the amendment of the term ‘business connection’ under the Indian Income Tax Act of 1961.

According to Section 9 of the Income Tax Act, a non-resident having a business connection in India is taxed only in respect of income attributable to the Indian operations. The Finance Act, 2003 added an explanation to Section 9 of the Income Tax Act, laying out situations under which an Indian agent would constitute a business connection of such non-resident entity in India.

This amendment might bring some worry lines for the BPOs, especially the captive units such as GE, Amex and HSBC that will be deemed to have their business connection in India. However, it will only be clear once the task force gives its recommendation. The task force is examining whether a non-resident company, which has outsourcing deals with a BPO outfit in India, is subject to tax in India.







The Indian BPO industry is yet to get a clear picture on the fact that when the foreign client of the Indian BPO company who concludes a contract through the call center is liable to tax in India. Indian BPO is still oblivious on the tax structure prevailing in the world of other competitive markets.







Coming back to the taxes on the royalty on certain imported software, it might affect BPOs that are using proprietary software imported from their parent companies abroad. So far, no such tax has been levied on the clients of BPO firms. Once implemented, the tax department will consider such imports as final services rendered and impose withholding tax on it, in line with the tax treatment of purchases of copyrighted products like recordings, designs, patents, etc.







The third point of concern is the rise of the transfer pricing for the BPO work, which is also creating some ripples in the taxman’s office. The Intra-firm contracts, which are between the parent companies overseas and their Indian subsidiaries, will be covered under this policy. The taxation authorities in some cases are skeptical about the lower unit prices that are being given to these subsidiaries than similar contracts with other non-parent BPO firms.







Which means that the parent company is retaining more profits overseas and limiting the money given to the Indian Company that reduces its profits and therefore the tax paid in India.


Arm’s-length pricing will stand true for captive units and not for Indian or third party BPOs. This practice is being used in various countries for various products and is not an alien term for few BPOs.







So far, the Indian government has been supporting the BPOs by giving tax holidays and various tax exemptions. But these new tax issues might put some brake in this fast growing industry that is quintessential for the rising Indian economy. This might also have a negative impact on the Indian edge–best costs with quality workforce. All might be settled once the task force submits its recommendations.





(CyberMedia News Service)

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